In the first week of August 2021, Ethereum developers are releasing a new set of upgrades to the platform.Ethereum 2.0 will address the problems related to rising transaction fees due to high demands and DeFi applications based on ETH, size of disk space needed to run an Ethereum client, and the carbon footprint of the proof-of-work consensus algorithm.These upgrades are intended to make Ethereum more “sound” than Bitcoin, or so claims Vitalik Buterin, the platform’s cofounder.However, these upgrades will affect the amount of rewards earned by miners, and will force many users to stake their ETH and decrease their liquidity.Since the announcement of releasing the first phase of Ethereum 2.0, ETH’s value rose from ~$550 to in December 2020 to ~$2,880 in August 2021.
ETH also achieved an all-time high of ~$4,132 in May 2021 due to the rise of DApps , non-fungible tokens (NFT) launched on the Ethereum blockchain and the general optimism about the crypto market in Q2 2021.Before proceeding, please read our disclaimer on investment related articles.
What are Ethereum 2.0 upgrades? Ethereum 2.0 upgrades are focused on 3 points: transaction scalability, disk space, and sustainability.The upgrades aim to solve these issues by changing the consensus algorithm from proof-of-work (PoW) to proof-of-stake (PoS) and introducing shard chains.Proof-of-stake Typically, mining rewards are earned based on a proof-of-work consensus, where miners compete to validate transactions and get rewarded with ETH tokens called “transaction fees”.
The proof-of-stake algorithm will remove the competition from the equation, instead users will be chosen to mint new tokens and validate transaction based on the size of their staked coins, and they will no longer receive transaction fees.This step, also called “The London Hard Fork”, will limit – the computing energy used to run massive computers to solve math equations which took place in large scale during the proof of work approach – the new coins that can be minted as a reward for transaction verification Shard chains Scalability issues are caused by network congestions due to high volume of transactions which exceed the platform’s current limit of 15-45 transactions/second.Developers claim that sharding ) (e.g.adding more nodes to the blockchain and splitting a database horizontally to spread the load) will reduce network congestion and increase transactions per second by creating new chains.This upgrade phase, known as Shard Chains, will spread the network’s load across 64 new chains enabling more transactions to be handled simultaneously.
Combining the changes to proof-of-stake algorithms and shard chains will results in a significant decrease of mining carbon footprint as users will no longer need to use hardware with large computational abilities to compete for mining rewards.
What are Ethereum 2.0 phases? To launch Ethereum 2.0 upgrades, there will be 3 phases: – The Beacon chain: This chain, which introduces the proof-of-stake consensus, will run separately from the current Ethereum Mainnet chain which relies on proof-of-work consensus.The beacon chain won’t be able to handle accounts or smart contracts at this phase.The Beacon chain was released in December 2020 and was set to provide 5% Annual Percent Rate (APR) (i.e.annual interest) for staked ETH tokens.- The Merge: The merge, as the name implies, is the phase where the current Mainnet chain and the Beacon chain will be merged into one chain which will rely solely on proof-of-stake.
Immediately after the merge, withdrawing staked ETH will not be supported until the complete Ethereum 2.0 phases are released.This phase is set to launch some time late 2021.- The Shard chain: This phase will introduce shard chains to the Ethereum network to give it more capacity to store and access data.However, these new nodes won’t be used for executing code.According to the developers, the steps to introduce shard chains are still being figured out until the release in 2022.Does Ethereum 2.0 kill mining? Yes.Although Ethereum 2.0 upgrades are not complete yet, the final phases will diminish ETH mining.
The “merge” phase, set to launch in late 2021, will mark the end of proof-of-work mining where users will no longer receive mining rewards.Also, there will no longer be miner extractable value ( MEV ).Is Ethereum 2.0 a good investment? Although transferring to a proof-of-stake consensus mechanism will eliminate mining rewards.It will also reduce the number of minted coins limiting ETH supply and as a result it can boost ETH price.
From this point of view, ETH 2.0 seems that it will create value.However, before the final release of Ethereum 2.0, which may take up until 2024, it will be difficult to profit from ETH: – Mining profitability will plunge significantly as puzzle solving difficulty is rising.ETH mining difficulty reached an all-time high of [~6,000] Terahash in March 2021.
– After the merge, mining will no longer be based on anonymous competition.
In order to be chosen to validate minted tokens, users must stake some of their owned ETH.In turn, this will decrease ETH liquidity.- Before the release of ETH2.0 as a whole, the platform will not support staked ETH withdrawal, disabling users from investing their ETH in different applications.However, all of these developments are public data and they should already have been included in the price of ETH.
In addition, if the project finally sees light and proves beneficial in terms of scalability and sustainability, other cryptocurrencies, such as Bitcoin , could follow their lead and adopt a proof-of-stake consensus.For more on cryptocurrency To learn more about cryptocurrency facts, feel free to read our in-depth articles about: – [44 Cryptocurrency Stats: History, market, adoption, users& crimes] – [Cryptocurrency ETFs: Pros, Cons, and Alternatives in 2021] And if you interested in investing in cryptocurrencies, don’t forget to read our in-depth guide on how to choose winner crypto projects and avoid scams , and scroll through our data-driven list of top 10 crypto exchanges .How can we do better? Your feedback is valuable.We will do our best to improve our work based on it..